Magnum Hunter (MHR) missed on both the top and bottom lines in Q2. It should come as no surprise as this company continues to over promise and under achieve. At one time, this company had a lot of promise. It had acreage in top notch Gonzales County acreage in the Eagle Ford. It also had good acreage in the Bakken, Utica and Marcellus. Magnum had really over leveraged itself over a period of years, and this has been difficult for the company as its interests are too spread out. This proved difficult to manage. This wasn't its only problem, but its a very general description of how it got here. This precipitated the deal to sell its Eagle Ford acreage to Penn Virginia (PVA). This sale was helpful in Magnum focusing on its other plays, and drove net income much higher for the quarter.
Magnum reported a Q2 loss of 18 cents/share. This missed estimates by 7 cents/share. Total revenues increased 98% year over year. 48% of this production was liquids. Oil and gas production increased 23% year over year. From this standpoint the company did well, but costs were also a big problem. Magnum saw its LOE increase per barrel of oil equivalent. This was attributed to high costs in the Bakken, bringing liquids production on line. Company production was negatively impacted due to Appalachian well shut ins as a result of pipeline and liquids handling issues with its midstream assets. Magnum also had permitting issues in West Virginia.
Its upstream capital expenditures through the first half of the year were $56.6 million for the Williston Basin, $43.2 million for the Appalachian region and $2.5 million for the South Texas region. After the sale of its Eagle Ford assets, the $300 million was reallocated with 50% to the Williston Basin, and 50% to its Appalachian leasehold. Magnum reiterated its 2013 exit rate of 23000 to 25000 Boe/d.
Magnum has three rigs in Appalachia. One of these rigs is at the Stalder pad. This is an 18 well pad, as planned. It plans to drill 14 net Marcellus wells in the second half of this year. Ten of those are operated. Magnum has 6 rigs running in the Bakken. It is doing well here, as it is producing between 5000 and 5500 barrels per day. Magnum has 5 net wells awaiting completion. 30-Day IP rates run between 500 and 800 Boe/d. EURs are modeled at 400 MBoe to 450 MBoe. Well costs are low at $6.7 million, and Magnum hopes to get this down to $6.5 million by year end. It plans another 18 net wells to be drilled by year end. Its 2013 exit rate in the Bakken is estimated at 7700 Boe/d.
In Divide and Burke counties Magnum is currently working with several partners. The most exciting is with Continental (CLR) in Burke. Continental is currently doing significant downspacing here. Its 320-acre density plot in southeast Divide will test all 4 benches of the Three Forks. Magnum also will be participating in a 3 mile lateral with Continental later this year. It is also working with Samson and Baytex (BTE). Oasis (OAS) has been pushing its acreage north into Burke from its northwest Mountrail County leasehold. In the fourth quarter, Magnum will drill two high interest wells with Oasis.
Eureka Hunter also reports volumes increasing quickly in the Marcellus and Utica. Last year the daily average was 23 million/day. August volumes were 125 million with a 2013 exit rate of 200 million. Magnum plans to divest this asset, plus others for somewhere between $150 and $200 million. I am very happy to see this, as it will strengthen its balance sheet. It chose to sell the Eagle Ford as it only had a small number of acres when compared to its other plays. Magnum asserts its current Utica leasehold will produce much better than its Eagle Ford asset. Companies like Gulfport (GPOR) and PDC Energy (PDCE), have had excellent results in the Utica. The map above shows the activity of this play. Anadarko (APC) has acreage near Magnum in Noble County. Gulfport is to the north, where it had an excellent result. It is important to note these are very early production numbers, and should improve as operators get more comfortable. It has added acreage in the Utica. Keep in mind some of this acreage is in the gas window, so the IRRs may not be as good as other operators in the condensate window.
In summary, Magnum is an interesting play going forward. Its Bakken and Appalachian acreage should see significant growth in the future. Bakken costs increased a lot in the quarter, but Magnum states this is a one-time situation. It has stopped drilling in Tableland due to lower IRRs, and I would guess this acreage is now for sale. It divesting of its Eagle Ford acreage was great for its balance sheet, and additional upcoming divestitures should put the company back on track. It could be a while until it puts its midstream business up for sale, but it looks attractive and Magnum should get a good price for it. Although I am skeptical, Magnum looks to be getting on track. I would not recommend buying MHR at this time, but it is definitely one to watch.
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